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New Developments Rock 401(k) Plan World


May 2015

Two recent developments in the form of new regulations issued by the Department of Labor (DOL) and a new Supreme Court decision have rocked the world of 401(k) plans. These changes simultaneously alter the traditional relationship between smaller employers who sponsor 401(k) plans and the financial services industry while expanding the fiduciary responsibilities of employers regarding their menu of 401(k) plan investment options. This article provides a brief overview of these new developments, which will be analyzed in our upcoming Benefits Webinar on July 14th.

New DOL Regulations for Investment Professionals

On April 20th, the DOL revised and reissued new proposed regulations that expand the definition of an ERISA fiduciary to include most investment professionals who provide investment advice to small employer plans and their participants. In the past, investment professionals who received commission-based compensation for their plan advisory services (e.g. 12b-1 fees, revenue sharing payments, marketing fees, administrative fees, sub-TA fees, sub-accounting fees, and other third-party payments) could avoid fiduciary status. By avoiding fiduciary status, investment professionals were able to steer clear of the prohibited transaction rules under the Internal Revenue Code and ERISA, which generally bar a fiduciary investment advisor from receiving, directly or indirectly, any compensation that is related to the selection of an investment by the plan sponsor or a participant.

Under the new regulations, only investment advisors who provide investment recommendations to a "large plan investor with financial expertise" (defined as plans with at least 100 or more participants or $100 million in assets) can avoid fiduciary status under the so-called "seller’s exemption" for large plans. For smaller plans, the DOL has proposed a limited class exemption from the prohibited transaction rules (known as the "best interests contract" or BIC exemption) that allows investment professionals to continue to provide investment advice to the sponsor of a 401(k) plan and receive commission-based compensation from the plan’s investments under certain scenarios. Under the BIC exemption, however, an investment professional can advise only an individual participant or beneficiary concerning personal investment decisions, or the fiduciary who manages the assets of a non-participant-directed plan. The BIC exemption does not permit an investment professional to provide recommendations to a plan sponsor concerning the plan’s menu of investment options and receive commission-based compensation from those investment options from a participant-directed 401(k) plan.

Tibble v. Edison

On May 18th, a unanimous Supreme Court held in Tibble v. Edison International that a fiduciary who selects the investment options for a participant-directed plan has an ongoing fiduciary duty to prudently monitor the plan’s investment options and to remove any options that become imprudent. In Tibble, the Court held that ERISA’s six-year statute of limitations did not bar the plaintiffs’ claims concerning investment options that were selected by the plan’s sponsor more than six years prior to the date the complaint was filed. According to the Tibble Court, the fiduciary’s duty to monitor the plan’s menu of investment options exists "separate and apart from the [fiduciary’s] duty to exercise prudence in selecting investments at the outset." Although Tibble involved an ERISA-regulated plan sponsored by a private employer, the reasoning of the decision was grounded in the common law of trusts, which governs both ERISA-exempt plans sponsored by governmental employers, and private trusts used in estate planning.

Tying these two developments together, what are the implications for employers who sponsor participant-directed 401(k) plans? First, the employer who sponsors a 401(k) plan acts a fiduciary (and thus is potentially personally liable) when selecting the plan’s menu of investment choices available to participants. Tibble makes clear that the employer’s fiduciary responsibilities do not end with the initial selection of the plan’s investment options. Rather, 401(k) plan sponsors have an on-going duty to periodically monitor the plan’s investment options, and to remove or change those options that are no longer prudent, either due to poor investment performance or because the fees and expenses charged by the mutual fund are excessive. Second, these developments reinforce the requirement of a 401(k) plan sponsor to continually monitor the professionals who provide investment advice and their compensation arrangements. Third, given the enhanced level of fiduciary responsibility for plan investments, plan sponsors will want to review the fiduciary structure of their plan documents to assess the risk of personal liability and the terms of coverage under their fiduciary liability insurance policies.

These pro-active responses will be explored in in our upcoming Benefits Webinar on July 14th. The ERISA attorneys in our Labor, Employment and Benefits Practice Group have already responded to these developments by scheduling fiduciary risk management reviews and related training sessions in response to requests by our clients. If you are interested in scheduling these services for your firm, please contact Dan Wintz ( or Adam Cockerill ( for more information.

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